Unless repealed, fuel subsidy time bomb soon to go off

Unless the Louisiana Legislature acts in its session beginning tomorrow, it looks like a ticking time bomb can go off to the detriment of the pocketbooks of the state’s fuel consumers and taxpayers but to the benefit of a special interest.

While a number of projects involving the production of biofuels appear on the horizon in Louisiana, one actually has gotten going. Diamond Green Diesel in Norco by the end of the year will have a capacity of producing 150 million gallons a year. Starting last June, it began operating near present capacity at 7,000 barrels a day with a manufactured market in place: California government mandates already provides a market the company believes will allow it to withstand the recent elimination of a $1.01 per gallon federal government subsidy.

Unfortunately, this incident of government regulation in one state will spawn its own mandate onto Louisiana, courtesy of the former Gov. Kathleen Blanco era – R.S. 3:4674. The law states that if biodiesel production, regardless of its intended final destination, reaches an annualized 10 million gallons, then within six months two percent of the total diesel sold by volume in the state must be biodiesel. At the rate above, the firm would sell over 140 million gallons a year, easily surpassing the mark and starting the clock. The law does allow for the Louisiana Commission of Weights and Measures to suspend the requirement if logistical problems prevent fulfilling the law’s mandate, but also makes the commissioner of agriculture and forestry issue regulations requiring the state to create incentives, paid for out of state dollars, to compensate for costs to achieve this sales standard.

Assuming no temporary waiver, this means of the diesel market that at least 2.8 million gallons a year must come from this source. At present, this represents only a fraction of the latest known figure (2012) of almost 43 million a year, which is of off-road sales only (for proprietary reasons, other sales are not listed). The most recently-available market prices of pure biodiesel in Gulf Coast states (last quarter of 2013) show, converted to a diesel gallon equivalent, this diesel costs 5 cents more per gallon than regular diesel (typically, they would be blended). Obviously, the difference is subject to change given market conditions, but at the present this means a very small increase foisted upon users, and, if incentives get created, potentially in the future the siphoning of state resources to those involved in the production and supply chain.

But even if presents costs are relatively small, why must consumers pay any additionally for this? And if capacity ramps up at the existing facility plus others get into production, it’s possible that one day the mandate would exceed total state diesel consumption, forcing more of it onto consumers. However, the most pressing question about this law is, if it was passed to encourage this kind of production (assuming it used less of fossil fuels and was cleaner) in order to lead to its consumption, if the production is occurring independently of that consideration, why must the guarantee of a state domestic market by the law exist?

Louisiana should not be in the business of telling consumers what kind of gasoline blend (the law also covers regular gasoline, and the use of ethanol from biomass of which none is being produced currently) they can use purchased in state, allowing production not even intended for the state to dictate prices and making consumers and potentially citizens pay for it. The Commission should meet this month and should waive the requirement. Then the Legislature needs to follow with repeal of this law that only serves to transfer state resources to the fuel producers.